If you are a struggling homeowner facing foreclosure, your city may use eminent domain at some point in the future to help you save your home. The first city to use this innovative approach is Richmond, California — it plans to seize underwater mortgages and restructure the loans. Of course, the mortgage lenders aren’t taking this course of action lying down.

Other cities around the country are keeping eye on Richmond. If the city meets with success, others may follow suit.

Richmond’s Plan

Usually when people think about eminent domain they associate it with the government forcibly taking private property to be used for new roads, schools, parks, and other developments that are for a public use. However, Richmond’s idea is a bit different — it plans to use eminent domain to seize mortgages.

Under its plan, the city would use eminent domain to:

purchase underwater loans by paying a portion of the fair market value to the lender

reduce the loan principal so that it is more in line with current property value, and then

find new investors to purchase the loans.

Opposition From Lenders (Surprise, Surprise)

In July 2013, Richmond sent letters to banks and other entities seeking to purchase over 600 home loans. If the institutions decline to accept the offers (and it looks like the offers will be rejected), the city said it intends to forcibly acquire the mortgages through eminent domain.

As a result, several major banks filed lawsuits seeking an injunction against the city alleging that using the power of eminent domain in this way illegally violates the U.S. Constitution, the California Constitution, and other state laws. Additionally, the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, is threatening to stop guaranteeing loans in cities, including Richmond, which condemn and seize underwater mortgages.

What Will Happen Next?

As of now, it is unknown how courts will rule on the issue using eminent domain in this novel manner. The issue could potentially go all the way to the U.S. Supreme Court.

Ultimately, Richmond will be an important test case since other local governments around the country are considering similar plans. How the situation plays out in Richmond will likely be an indicator of what will happen in those places.